February 16, 2009

The government, facing a housing crisis that’s escalated far beyond
all but the most dire predictions, is looking at ways to spend at least
$50 billion to make sure borrowers can stay in their homes.

President Barack Obama is scheduled to announce a sweeping
initiative on Feb 18 in a speech in Arizona, one of the nation’s most
severe hot spots for foreclosures. Details of the government’s plan are
not yet ready, but there is already plenty of chatter in the nation’s
capital about how it might work.

Here are some questions and answers about the plan that’s coming together.

Q: How might the government’s plan work?

A: The plan is likely to feature hefty incentive payments designed
to encourage the lending industry to lower mortgage rates or reduce the
total principal amount owed by borrowers, a Democratic Senate aide
briefed on the plan said Friday. The idea is believed to be attractive
because it is expected to be far less expensive than having the
government buy up troubled loans, which are often combined and divided
into mortgage-linked securities that are owned by investors.

It was unclear, however, whether those government subsidies would be
paid up front to companies that collect mortgage payments, or whether
they would stretch out over several years. Those companies, known as
loan servicers, have been roundly criticized for not being equipped for
a massive surge in defaults and foreclosures.

Q: How big is the problem?

A: Over the past two years, foreclosures have skyrocketed. More than
2.3 million homeowners faced foreclosure proceedings last year, up more
than 80 percent increase from 2007, and analysts say that number could
soar as high as 10 million in the coming years, depending on the
severity of the recession.

February 10, 2009

European Union finance ministers agreed Tuesday to coordinate the
way they could tackle toxic assets on banks' balance sheets that have
frozen lending and aggravated the recession.

They are aiming to
stem a possible rash of go-it-alone government moves among the EU's 27
nations — such as Britain's plan to insure the bad assets that have
punched huge holes in banks' balance sheets.

February 08, 2009

Two narratives seem to be forming to describe the underlying causes of the financial crisis. One, as outlined in a New York Times
front-page story on Sunday, December 21, is that President Bush
excessively promoted growth in home ownership without sufficiently
regulating the banks and other mortgage lenders that made the bad
loans. The result was a banking system suffused with junk mortgages,
the continuing losses on which are dragging down the banks and the
economy. The other narrative is that government policy over many
years--particularly the use of the Community Reinvestment Act and
Fannie Mae and Freddie Mac to distort the housing credit system--
underlies the current crisis. The stakes in the competing narratives
are high. The diagnosis determines the prescription. If the Times
diagnosis prevails, the prescription is more regulation of the
financial system; if instead government policy is to blame, the
prescription is to terminate those government policies that distort
mortgage lending.

There really isn’t any question of approach is factually correct: right on the front page of the Times edition of December 21 is a chart that shows the growth of home ownership in theUnited Statessince 1990. In 1993 it was 63 percent; by the end of theClintonadministration it was 68 percent. The growth in the Bush administration was about 1 percent. The Times
itself reported in 1999 that Fannie Mae and Freddie Mac were under
pressure from the Clinton administration to increase lending to
minorities and low-income home buyers--a policy that necessarily
entailed higher risks. Can there really be a question, other than in
the fevered imagination of the Times, where the push to reduce lending standards and boost home ownership came from?